Crowdfunding

The Emergence of Online Investing

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Crowdfunding: The Emergence of Online Investing

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Online investing is a new trend in venture capital industry that has arisen in recent years. It started from the belief that a gap exists between demand side (startups, capital seekers) and offer side (seed and early stage investors). Along with the soaring digitalization of economy, online platforms aiming at connecting such demand and supply were born. This phenomenon is called crowdfunding and, although it started as pledging, it has lately evolved to the equity-based form. Entrepreneurs can create their profile online and search for capital providers investing from very little amounts. What they are offering in exchange for the investment is a stake in the company’s equity. This has to be set according to the size of the business opportunity and the capital requirement.

 Problem: Offline Marketplace May Not Be Easily Accessible

This practice has until now been offline – that is, the marketplace on which these two sides meet was a physical place, mainly entrepreneurial competitions and similar social events that attract a large audience. However, this supposes that both sides of the equation are aware of such marketplaces and can thus attend. This is not necessarily the case for entrepreneurs, especially if at their first startup. Networking has been and still is crucial in such field, determining a waste of innovation from entrepreneurs’ side.

The Solution: Online Investing Marketplace

Nevertheless, the birth of crowdfunding has eventually fulfilled such gap between the two sides by matching the demand and supply online. It would be interesting to investigate whether the birth of such intangible marketplace is beneficial to both parties or if it simply benefits one of them. As a matter of fact, if the advantages to entrepreneurs can immediately be grasped, it is still not clear whether investors also can get benefits out of it. Yet, actually investors are supposed to be already well connected to the offline network of market agents by being part of Business Angel networks (BANs), thus having access to most of the venues where matching is made. Accordingly, they should have no incentives to join online investing networks.In the next blog post, I will focus on Business Angels and in the one after on Venture Capital funds (VC). Equity-based crowdfunding can be applicable to both since it does not necessarily discriminated according to the stage of development. In addition, it is interesting to analyze the drivers that can bring VC funds to an online investment place, given the power of investment that they usually carry with them.

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